Monday, April 15, 2013

Loonies love interest rate cuts and QE.

Once upon a time in Loonyland they had a credit crunch. Many people had over-borrowed and many of the loans made by banks turned out to worthless. So banks went bust, and a recession ensued.

As a way of escaping the recession, central bankers had the brilliant idea of slashing interest rates to record low levels so as to encourage everyone to borrow more, and hence repeat the disaster.

But the common people were more financially sphisticated than central bankers. The common people refused to borrow more. In fact they did the opposite: they “deleveraged”, that is they paid off their debts.

That phenomonen is shown on the chart below. As you can see, the effect of cutting interest rates, was exactly the opposite of the desired effect: a triumph for lunacy.

The chart is based on one that was published by economicshelp.org.Base rates (red line) are taken from right hand column here.

This caused much frustration for central bankers and politicians. So they came up with another idea: quantitative easing. That involved printing money and buying assets off the rich, the idea being that the rich would then increase their spending on champagne, McMansions, jewellery, Rolex watches, yachts and so on.

You might have thought that the political left in Loonyland would object to boosting an economy via upping expenditure on the above frivolities. But not a bit of it. The political left in Loonyland (sometimes known as the “loony-left”) were every bit as loony and the political right. And members of the loony-left all nodded their heads in approval when quantitative easing was implemented.

In defence of Loonyland (aka “The UK”) it should be said that a very similar ailment afflicts other countries on Planet Bonkers. For example there is the USA (Unhinged Society of Aberrants) which is run by inmates of a mad-house known as “Congress”.

And then there is Europe, cradel of Western civilisation which has now descended to whipping any country with a poor economic performance with the austerity birch with a view to transforming the performance from feeble to disastrous.